I have seen investment property partnerships very often in my career. Just like in any business you will find partnerships. Sometimes they are built originally from friendships, sometimes they are between complete strangers. Regardless of their origin, partnerships can create a huge synergy by drawing on each of the partners strengths and bolstering their weaknesses. Conversely, I have seen some miserable partnerships that rival celebrity marriages! Real Estate Investment partnerships can be even more tricky as you have assets (property) and liabilities (mortgages) that are not easily divided and/or disposed on. I think the keys to success is obvious, but not many people do it prior to starting the partnership. You must define everything in writing and then have that document reviewed by a competent attorney. Here are just some items to think about when buying or owning Investment Property with one or more partners:
- Who is responsible for day-to-day management of the property? Who is the backup partner if the primary is on vacation or unavailable (and does anyone know how to reach the “other” partner(s))?
- If the property requires a major capital improvement (requiring major costs), how will the partners divide up the costs and/or time to oversee the improvement?
- What happens if one partner dies, becomes incapacitate, divorced, gets married, or goes to jail?
- Do you have insurance on each partner to allow the partnership to buy out the partner’s heirs? Does that insurance keep up with the value of the investment?
- How will any profits (or losses) from the sale of the property by allocated?
- What if one partner wants to do a 1031 exchange, but the other partner wants the cash when you sell? How do you handle the tax consequences?
- Are any partners allowed to pay themselves from the operating funds?
- Can partners take profits from the investment real estate during the year? If so, how is that managed?
- If you have an apartment vacancy that requires the partners to infuse cash into the partnership, how much does each partner pay?
- Can one partner force the other(s) to buy him out? If so, how is the price set?
Partnerships can help the average real estate investor become great. It can also lead to frustration and misery in the wrong situation. Only through careful planning and written documents can you insure that any investment property partnerships can be successful.